Know your tax brackets for 2024

Know Your Tax Bracket 2024

There are seven federal tax brackets for the 2024 tax year: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Every year, the IRS modifies the tax brackets for inflation. Your specific bracket depends on your taxable income and filing status. These are the rates for taxes due in April 2025.

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Marginal tax rate

The marginal tax rate is the highest tax rate you have to pay for every additional dollar of income you earn. A 25% marginal tax rate means you will pay 25 cents for every extra dollar you report on your earnings.

Effective Tax Rate

The effective tax rate is your total tax amount divided by your total earned income.

Single Filers Tax Brackets for 2024

10% $0 to $11,600 10% of taxable income
12% Over $11,600 but not over $47,150 $1,160 plus 12% of the excess over $11,600
22% Over $47,150 but not over $100,525 $5,426 plus 22% of the excess over $47,150
24% Over $100,525 but not over $191,950 $17,168.50 plus 24% of the excess over $100,525
32% Over $191,950 but not over $243,725 $39,110.50 plus 32% of the excess over $191,150
35% Over $243,725 but not over $609,350 $55,678.50 plus 35% of the excess over $243,725
37% Over $609,350 $183,647.25 plus 37% of the excess over $609,350

Married Filing Jointly Tax Brackets for 2024

10% $0 to $23,200 10% of taxable income
12% Over $23,200 but not over $94,300 $2,320 plus 12% of the excess over $23,200
22% Over $94,300 but not over $201,050 $10,852 plus 22% of the excess over $94,300
24% Over $201,050 but not over $383,900 $34,337 plus 24% of the excess over $201,050
32% Over $383,900 but not over $487,450 $78,221 plus 32% of the excess over $383,900
35% Over $487,450 but not over $731,200 $111,357 plus 35% of the excess over $487,450
37% Over $731,200 $196,669.50 plus 37% of the excess over $731,200

Married Filing Separately Tax Brackets for 2024

10% $0 to $11,600 10% of taxable income
12% Over $11,600 but not over $47,150 $1,160 plus 12% of the excess over $11,600
22% Over $47,150 but not over $100,525 $5,426 plus 22% of the excess over $47,150
24% Over $100,525 but not over $191,950 $17,168.50 plus 24% of the excess over $100,525
32% Over $191,950 but not over $243,725 $39,110.50 plus 32% of the excess over $191,150
35% Over $243,725 but not over $365,600 $55,678.50 plus 35% of the excess over $243,725
37% Over $365,600 $98,334.75 plus 37% of the excess over $365,600

Head of Household Tax Brackets for 2024

10% $0 to $16,550 10% of taxable income
12% Over $16,550 but not over $63,100 $1,655 plus 12% of the excess over $16,550
22% Over $63,100 but not over $100,500 $7,241 plus 22% of the excess over $63,100
24% Over $100,500 but not over $191,950 $15,469 plus 24% of the excess over $100,500
32% Over $191,950 but not over $243,700 $37,417 plus 32% of the excess over $191,150
35% Over $243,700 but not over $609,350 $53,977 plus 35% of the excess over $243,700
37% Over $609,350 $181,954.50 plus 37% of the excess over $609,350

2024 Standard Deduction

The amount of the standard deduction reduces your taxable income. Usually, the IRS adjusts the standard deduction for inflation every year.

You can choose a standard or itemized deduction when you file your taxes. It only makes sense to itemize your deductions if their total value exceeds the standard deduction.

2024 Standard Deduction
Filing Status Deduction Amount
Single $14,600
Married Filing Jointly $29,200
Head of Household $21,900

Long-term capital gain taxes

You owe a capital gains tax on the profit from selling capital assets such as stocks, options, bonds, real estate, and cryptocurrencies. Long-term capital gains have a more favorable tax treatment than ordinary taxable income. To qualify for long-term status, you must realize a profit on an investment after holding it for one calendar year or 365 days. Short-term capital gains are taxable as ordinary income.

Taxable Income Over
Tax Rate Single Married Filing Jointly Head of Household
0% $0 $0 $0
15% $47,025 $94,050 $63,000
20% $518,900 $583,750 $551,350

Net Investment Income tax

A net investment income tax of 3.8% applies to all taxpayers with net investment income above specific threshold amounts. In general, net investment income includes

  • Long Term Capital gains
  • Short capital gains
  • Dividends
  • Taxable interest
  • Rental and royalty income
  • Passive income from investments you don’t actively participate in
  • Business income from trading financial instruments or commodities
  • The taxable portion of nonqualified annuity payments

You will pay 3.8% of the smaller value between

  1. Your total net investment income, or
  2. the excess of modified adjusted gross income over the following threshold amounts:
  • $200,000 for single and head-of-household filers
  • $250,000 for married filing jointly or qualifying widow(er)
  • $125,000 for married filing separately

Alternative Minimum Tax Levels for 2024

The AMT exemption amount in 2024 is $85,700 for singles and $133,300 for married couples filing jointly.

In 2024, the 28% AMT rate applies to an excess AMT Income of $232,600 for all taxpayers ($116,300 for married couples filing separate returns).

AMT exemptions phase out at 25 cents per dollar earned once AMTI reaches $609,350 for single filers and $1,218,700 for married taxpayers filing jointly.

 

Tax Saving Moves for 2023

Tax Saving moves for 2023

Tax Saving Moves for 2023: As we approach the end of  2023, I am traditionally sharing my favorite list of tax-saving moves to help you lower your tax bill for 2023. The US tax rules change every year. 2023 was no exception.

2023 has been another challenging year for investors. The interest rates are rising, inflation is stabilizing but still high, and the stock market is volatile as always. Since we don’t have any control over the economy, proactive tax planning is essential for achieving your financial goals. Furthermore, comprehensive financial and tax planning is critical to attaining tax alpha. Making smart tax decisions can help you grow your wealth while you prepare for various outcomes. 

Today, you have an excellent opportunity to review your finances. You can make several smart and easy tax moves to lower your tax bill and increase your tax refund. Being ahead of the curve will help you make well-informed decisions without the stress of tax deadlines. Start the conversation today. 

Retirement Calculator

1. Know your tax bracket

The first step in managing your taxes is knowing your tax bracket. 2023 federal tax rates fall into the following brackets depending on your taxable income and filing status. Knowing where you land on the tax scale can help you make informed decisions, especially when you plan to earn additional income, exercise stock options, or receive RSUs

Here are the Federal tax bracket and rates for 2023.

Tax Rate Single Filers Married Individuals Filing Joint Returns Heads of Households Married Individuals Filing Separately
10% $0 to $11,000 $0 to $22,000 $0 to $15,700 $0 to $11,000
12% $11,000 to $44,725 $22,000 to $89,450 $15,700 to $59,850 $11,000 to $44,725
22% $44,725 to $95,375 $89,450 to $190,750 $59,850 to $95,350 $44,725 to $95,375
24% $95,375 to $182,100 $190,750 to $364,200 $95,350 to $182,100 $95,375 to $182,100
32% $182,100 to $231,250 $364,200 to $462,500 $182,100 to $231,250 $182,100 to $231,250
35% $231,250 to $578,125 $462,500 to $693,750 $231,250 to $578,100 $231,250 to $323,925
37% $578,125 or more $693,750 or more $578,100 or more $323,925 or more

2. Decide to itemize or use a standard deduction

The standard deduction is a specific dollar amount that allows you to reduce your taxable income. Nearly 90% of all tax filers use the standard deduction instead of itemizing. It makes the process a lot simpler for many Americans. However, in some circumstances, your itemized deductions may surpass the dollar amount of the standard deduction and allow you to lower your tax bill even further.

Here are the values for 2023:

Filing Status Deduction Amount
Single $13,850
Married Filing Jointly $27,700
Head of Household $20,800

3. Maximize your retirement contributions

You can save taxes by contributing to a retirement plan. Most contributions to qualified retirement plans are tax-deductible and lower your tax bill.

  • For employees – 401k, 403b, 457, and TSP. The maximum contribution to qualified employee retirement plans for 2023 is $22,500. If you are  50 or older, you can contribute an additional $7,500.
  • For business owners – SEP IRA, Solo 401k, and Defined Benefit Plan. Business owners can contribute to SEP IRA, Solo 401k, and Defined Benefit Plans to maximize their retirement savings and lower their tax bills. The maximum contribution to SEP-IRA and Solo 401k in 2023 is $66,000 or $73,500 if you are 50 and older.

If you own a SEP IRA, you can contribute up to 25% of your business wages.

In a solo 401k plan, you can contribute as an employee and an employer. The employee contribution is subject to a $22,500 limit plus a $7,500 catch-up. The employer match is limited to 25% of your compensation for a maximum of $43,500. In many cases, the solo 401k plan can allow you to save more than a SEP IRA.

A defined Benefit Plan is an option for high-income earners who want to save more aggressively for retirement above the SEP-IRA and 401k limits. The DB plan uses actuary rules to calculate your annual contribution limits based on your age and compensation. All contributions to your defined benefit plan are tax-deductible, and the earnings grow tax-free.

4. Roth conversion

Transferring investments from a Traditional IRA or 401k plan to a Roth IRA is known as Roth Conversion. It allows you to switch from tax-deferred to tax-exempt retirement savings. 

The conversion amount is taxable for income purposes. The good news is that even though you will pay more taxes in the current year, the conversion may save you a lot more money in the long run.

If you believe your taxes will go up in the future, Roth Conversion could be a very effective way to manage your future taxes. 

5. Contribute to a 529 plan

The 529 plan is a tax-advantaged state-sponsored investment plan allowing parents to save for their children’s future college expenses. 529 plan works similarly to the Roth IRA. You make post-tax contributions. Your investment earnings grow free from federal and state income tax if you use them to pay for qualified educational expenses. The 529 plan has a distinct tax advantage compared to a regular brokerage account, as you will never pay taxes on your dividends and capital gains.

Over 30 states offer a full or partial tax deduction or a credit on your 529 contributions. You can find the complete list here. Your 529 contributions can significantly lower your state tax bill if you live in these states.

6. Make a donation

Donations to charities, churches, and various non-profit organizations are tax-deductible. You can support your favorite cause by simultaneously giving back and lowering your tax bill. Your contributions can be in cash, household goods appreciated assets, or directly from your IRA distributions. 

Charitable donations are tax-deductible only when you itemize your tax return. If you make small contributions throughout the year, you might be better off taking the standard deduction.

If itemizing your taxes is crucial, you might want to consolidate your donations in one calendar year. So, instead of making multiple charitable contributions over the years, you can give one large donation every few years.

7. Tax-loss harvesting

The stock market is volatile. If you are holding stocks and other investments that dropped significantly in 2023, you can consider selling them. Selling losing investments to reduce your tax liability is known as tax-loss harvesting. It works for capital assets outside retirement accounts (401k, Traditional IRA, and Roth IRA). Capital assets may include real estate, cryptocurrency, cars, gold, stocks, bonds, and any investment property not for personal use.

The IRS allows you to use capital losses to offset capital gains. You can deduct the difference as a loss on your tax return if your capital losses exceed your capital gains. This loss is limited to $3,000 annually or $1,500 if married and filing a separate return. Furthermore, you can carry forward your capital losses for future years and offset future gains.

8. Prioritize long-term over short-term capital gains

Another way to lower your tax bill when selling assets is to prioritize long-term over short-term capital gains. The current tax code benefits investors who keep their assets for more than one calendar year. Long-term investors receive a preferential tax rate on their gains. While investors with short-term capital gains will pay taxes at their ordinary income tax level

Here are the long-term capital gain tax brackets for 2023:

LTCG Tax Brackets 2023 IRS

Furthermore, high-income earners will also pay an additional 3.8% net investment income tax.

9. Contribute to FSA

With healthcare costs constantly increasing, you can use a Flexible Spending Account (FSA)  to cover your medical bills and lower your tax bill.

Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is a tax-advantaged savings account offered through your employer. The FSA allows you to save pretax dollars to cover medical and dental expenses for yourself and your dependents. 

The maximum contribution for 2023 is $3,050 per person. If you are married, your spouse can save another $3,050 for $6,100 per family. Some employers offer a matching FSA contribution for up to $500. Typically,  you must use your FSA savings by the end of the calendar year. However, for 2023, the maximum carryover amount is $610, which you can roll over for the following calendar year.

Dependent Care FSA (DC-FSA)

A Dependent Care FSA  is a pretax benefit account that you can use to pay for eligible dependent care services, such as preschool, summer day camp, before or after-school programs, and child or adult daycare. You can reduce your tax bill while taking care of your children and loved ones while you continue working.

The American Rescue Plan Act (ARPA) raised pretax contribution limits for dependent care flexible spending accounts (DC-FSAs) for 2023.   For married couples filing jointly or single parents filing as head of household, the maximum contribution limit is $5,000. 

10. Buy an electric vehicle

if you purchase an electric car with a final assembly in North America, you might be eligible for a Federal tax credit. Many states have separate incentives. The maximum credit is $7,500, depending on your income, the size of the vehicle, and its battery capacity.

The credit equals:

  • $2,917 for a vehicle with a battery capacity of at least 5 kilowatt hours (kWh)
  • Plus $417 for each kWh of capacity over 5 kWh

Check the IRS website for the most recent list of vehicles and rules.

11. Contribute to a Health Savings Account (HSA)

A Health Savings Account (HSA) is an investment account for individuals under a High Deductible Health Plan (HDHP) that allows you to save money on a pretax basis to pay for eligible medical expenses.

Keep in mind that the HSA has three distinct tax advantages.

  1. All HSA contributions are tax-deductible and will lower your tax bill.
  2. Your investments grow tax-free. You will not pay taxes on dividends, interest, and capital gains.
  3. You don’t pay taxes on those withdrawals if you use the account for eligible medical expenses.

The qualified High Deductible Plan typically covers only preventive services before the deductible. To qualify for the HSA, the HDHP should have a minimum deductible of $1,500 for an individual and $3,000 for a family. Additionally, your HDHP must have an out-of-pocket maximum of up to $7,500 for one-person coverage or $15,000 for families.

The maximum contributions in HSA for 2023 are $3,850 for individual coverage and $7,750 for families. HSA participants of age 55 or older can contribute an additional $1,000 as a catch-up contribution. Unlike the FSA, the HSA doesn’t have a spending limit, and you can carry over the savings in the next calendar year.

12. Defer or accelerate income

Is 2023 shaping up to be a high income for you? Perhaps you can defer some of your income from this calendar year into 2024. This move will allow you to reduce or delay higher income taxes. Even though it’s not always possible to defer wages, you might be able to postpone a large bonus, royalty, capital gains, option exercise, or one-time payment. Remember, it only makes sense to defer income if you expect to be in a lower tax bracket next year.

On the other hand, if you expect to be in a higher tax bracket next year, you may consider taking as much income as possible in 2023.

Know your tax brackets for 2023

Tax Brackets 2023

There are seven federal tax brackets for the 2023 tax year: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Every year the IRS modifies the tax brackets for inflation. Your specific bracket depends on your taxable income and filing status. These are the rates for taxes due in April 2024.

Retirement Calculator

Marginal tax rate

The marginal tax rate is the highest tax rate you have to pay for every additional dollar of income you earn. A 25% marginal tax rate means you will pay 25 cents for every extra dollar you report on your earnings.

Effective Tax Rate

The effective tax rate is your total tax amount divided by your total earned income.

Single Filers Tax Brackets for 2023

Tax rate Taxable income bracket Your taxes
10% $0 to $11,000 10% of taxable income
12% $11,000 to $44,725 $1,100 plus 12% of the amount over $11,000
22% $44,725 to $95,375 $5,147 plus 22% of the amount over $44,725
24% $95,375 to $182,100 $16,290 plus 24% of the amount over $95,375
32% $182,100 to $231,250 $37,104 plus 32% of the amount over $182,100
35% $231,250 to $578,125 $52,832 plus 35% of the amount over $231,250
37% $578,125 or more $174,238.25 plus 37% of the amount over $578,125

Married Filing Jointly Tax Brackets for 2023

Tax rate Taxable income bracket Your taxes
10% $0 to $22,000 10% of taxable income
12% $22,000 to $89,450 $2,200 plus 12% of the amount over $22,000
22% $89,450 to $190,750 $10,294 plus 22% of the amount over $89,450
24% $190,750 to $364,200 $32,580 plus 24% of the amount over $190,750
32% $364,200 to $462,500 $74,208 plus 32% of the amount over $364,200
35% $462,500 to $693,750 $105,664 plus 35% of the amount over $462,500
37% $693,750 or more $186,601.50 plus 37% of the amount over $693,750

Married Filing Separately Tax Brackets for 2023

Tax rate Taxable income bracket Your taxes
10% $0 to $11,000 10% of taxable income
12% $11,000 to $44,725 $1,100 plus 12% of the amount over $11,000
22% $44,725 to $95,375 $5,147 plus 22% of the amount over $44,725
24% $95,375 to $182,100 $16,290 plus 24% of the amount over $95,375
32% $182,100 to $231,250 $37,104 plus 32% of the amount over $182,100
35% $215,951 to $346,875 $52,832 plus 35% of the amount over $231,250
37% $346,875 or more $93,300.75 plus 37% of the amount over $346,875

Head of Household Tax Brackets for 2023

Tax rate Taxable income bracket Your Taxes
10% $0 to $15,700 10% of taxable income
12% $15,700 to $59,850 $1,570 plus 12% of the amount over $15,700
22% $59,850 to $95,350 $6,868 plus 22% of the amount over $59,850
24% $95,350 to $182,100 $14,678 plus 24% of the amount over $95,350
32% $182,100 to $231,250 $35,498 plus 32% of the amount over $182,100
35% $231,250 to $578,100 $51,226 plus 35% of the amount over $231,250
37% $578,100 or more $172,623.50 plus 37% of the amount over $578,100

2023 Standard Deduction

The amount of the standard deduction reduces your taxable income. Usually, the IRS adjusts the standard deduction for inflation every year.

You can choose a standard or itemized deduction when you file your taxes. It only makes sense to itemize your deductions if their total value is higher than the standard deduction.

 

Filing Status Deduction Amount
Single $13,850
Married Filing Jointly $27,700
Head of Household $20,800

Long-term capital gain taxes

You owe a capital gains tax on the profit from selling capital assets such as stocks, options, bonds, real estate, and cryptocurrencies. Long-term capital gains have a more favorable tax treatment than your ordinary taxable income. To qualify for long-term status, you must realize a profit on an investment after holding it for one calendar year or 365 days. Short-term capital gains are taxable as ordinary income.

Taxable Income Over
Tax Rate Single Married Filing Jointly Head of Household
0% $0 $0 $0
15% $44,625 $89,250 $59,750
20% $492,300 $553,850 $523,050

Net Investment Income tax

A net investment income tax of 3.8% applies to all taxpayers with net investment income above specific threshold amounts. In general, net investment income includes

  • Long Term Capital gains
  • Short capital gains
  • Dividends
  • Taxable interest
  • Rental and royalty income
  • Passive income from investments you don’t actively participate in
  • Business income from trading financial instruments or commodities
  • The taxable portion of nonqualified annuity payments

You will pay 3.8% of the smaller value between

  1. Your total net investment income, or
  2. the excess of modified adjusted gross income over the following threshold amounts:
  • $200,000 for single and head-of-household filers
  • $250,000 for married filing jointly or qualifying widow(er)
  • $125,000 for married filing separately

Alternative Minimum Tax Levels for 2023

The AMT exemption amount for 2023 is $81,300 for singles and $126,500 for married couples filing jointly.

In 2023, the 28% AMT rate applies to an excess AMTI of $220,700 for all taxpayers ($110,350 for married couples filing separate returns).

AMT exemptions phase out at 25 cents per dollar earned once AMTI reaches $578,150 for single filers and $1,156,300 for married taxpayers filing jointly.

 

Tax Saving Strategies for 2022

Tax Saving Strategies for 2022

As we approach the end of  2022, I am sharing my favorite list of tax-saving ideas to help you lower your tax bill for 2022. In my experience, the US tax rules change frequently. 2022 was no exception.

2022 has been a tough year for investors. The interest rates are rising, and the stock market is volatile. Since we don’t have any control over the economy, proactive tax planning is essential for achieving your financial goals. Furthermore, it is key to attaining tax alpha. For you,  achieving Tax Alpha is a process that starts on day 1. Making smart tax decisions can help you grow your wealth while you prepare for various outcomes. 

Today, you have an excellent opportunity to review your finances. You can make several smart and easy tax moves to lower your tax bill and increase your tax refund. Being ahead of the curve will help you make well-informed decisions without the stress of tax deadlines. Start the conversation today. 

Retirement Calculator

1. Know your tax bracket

The first step of managing your taxes is knowing your tax bracket. In 2022, federal tax rates fall into the following brackets depending upon your taxable income and filing status. Knowing where you land on the tax scale can help you make informed decisions, especially when you plan to earn additional income, exercise stock options, or receive RSUs

Here are the Federal tax bracket and rates for 2022.

Tax rate Single Married Filing Jointly Married Filing Separately Head of household
10% $0 to $10,275 $0 to $20,550 $0 to $10,275 $0 to $14,650
12% $10,276 to $41,775 $20,551 to $83,550 $10,276 to $41,775 $14,651 to $55,900
22% $41,776 to $89,075 $83,551 to $178,150 $41,776 to $89,075 $55,901 to $89,050
24% $89,076 to $170,050 $178,151 to $340,100 $89,076 to $170,050 $89,051 to $170,050
32% $170,051 to $215,950 $340,101 to $431,900 $170,051 to $215,950 $170,051 to $215,950
35% $215,951 to $539,900 $431,901 to $647,850 $215,951 to $323,925 $215,951 to $539,900
37% $539,901 or more $647,851 or more $323,926 or more $539,901 or more

2. Decide to itemize or use a standard deduction

The standard deduction is a specific dollar amount that allows you to reduce your taxable income. Nearly 90% of all tax filers use the standard deduction instead of itemizing. It makes the process a lot simpler for many Americans. However, in some circumstances, your itemized deductions may surpass the dollar amount of the standard deduction and allow you to lower your tax bill even further.

Here are the values for 2022:

2022 Standard Deduction  
Filing Status Deduction Amount
Single $12,950
Married Filing Jointly $25,900
Married Filing Separately $12,950
Head of Household $19,400

3. Maximize your retirement contributions

You can save taxes by contributing to a retirement plan. Most contributions to qualified retirement plans are tax-deductible and lower your tax bill.

  • For employees – 401k, 403b, 457, and TSP. The maximum contribution to qualified employee retirement plans for 2022 is $20,500. If you are  50 or older, you can contribute an additional $6,500.
  • For business owners – SEP IRA, Solo 401k, and Defined Benefit Plan. Business owners can contribute to SEP IRA, Solo 401k, and Defined Benefit Plans to maximize their retirement savings and lower their tax bills. The maximum contribution to SEP-IRA and Solo 401k in 2022 is $61,000 or $67,500 if you are 50 and older.

If you own SEP IRA, you can contribute up to 25% of your business wages.

In a solo 401k plan, you can contribute as an employee and an employer. The employee contribution is subject to a $20,500 limit plus a $6,500 catch-up. The employer match is limited to 25% of your compensation for a maximum of $40,500. In many cases, the solo 401k plan can allow you to save more than SEP IRA.

A defined Benefit Plan is an option for high-income earners who want to save more aggressively for retirement above the SEP-IRA and 401k limits. The DB plan uses actuary rules to calculate your annual contribution limits based on your age and compensation. All contributions to your defined benefit plan are tax-deductible, and the earnings grow tax-free.

4. Roth conversion

Transferring investments from a Traditional IRA or 401k plan to a Roth IRA is known as Roth Conversion. It allows you to switch from tax-deferred to tax-exempt retirement savings. With stocks in a bear market, 2022 offers an excellent opportunity for Roth conversion and long-term tax planning. 

The conversion amount is taxable for income purposes. The good news is that even though you will pay more taxes in the current year, the conversion may save you a lot more money in the long run.

If you believe your taxes will go up in the future, Roth Conversion could be a very effective way to manage your future taxes. 

5. Contribute to a 529 plan

The 529 plan is a tax-advantaged state-sponsored investment plan, allowing parents to save for their children’s future college expenses. 529 plan works similarly to the Roth IRA. You make post-tax contributions. Your investment earnings grow free from federal and state income tax if you use them to pay for qualified educational expenses. The 529 plan has a distinct tax advantage compared to a regular brokerage account, as you will never pay taxes on your dividends and capital gains.

Over 30 states offer a full or partial tax deduction or a credit on your 529 contributions. You can find the complete list here. Your 529 contributions can significantly lower your state tax bill if you live in these states.

6. Make a donation

Donations to charities, churches, and various non-profit organizations are tax-deductible. You can support your favorite cause by giving back and lowering your tax bill simultaneously. Your contributions can be in cash, household good, appreciated assets, or directly from your IRA distributions. 

Charitable donations are tax-deductible only when you itemize your tax return. If you make small contributions throughout the year, you might be better off taking the standard deduction.

If itemizing your taxes is crucial, you might want to consolidate your donations in one calendar year. So, instead of making multiple charitable contributions over the years, you can give one large donation every few years.

7. Tax-loss harvesting

The stock market is volatile. If you are holding stocks and other investments that dropped significantly in 2022, you can consider selling them. Selling losing investments to reduce your tax liability is known as tax-loss harvesting. It works for capital assets outside retirement accounts (401k, Traditional IRA, and Roth IRA). Capital assets may include real estate, cryptocurrency, cars, gold, stocks, bonds, and any investment property not for personal use.

The IRS allows you to use capital losses to offset capital gains. You can deduct the difference as a loss on your tax return if your capital losses are higher than your capital gains. This loss is limited to $3,000 per year or $1,500 if married and filing a separate return. Furthermore, you can carry forward your capital losses for future years and offset future gains.

8. Prioritize long-term over short-term capital gains

Another way to lower your tax bill when selling assets is to prioritize long-term over short-term capital gains. The current tax code benefits investors who keep their assets for more than one calendar year. Long-term investors receive a preferential tax rate on their gains. While investors with short-term capital gains will pay taxes at their ordinary income tax level

Here are the long-term capital gain tax brackets for 2022:

Long-term capital gains tax rate Single Married Filing Jointly
0% $0 to $41,675 $0 to $83,350
15% $41,675 – $459,750 $83,350 to $517,200
20% Over $459,750 Over $517,200

Furthermore, high-income earners will also pay an additional 3.8% net investment income tax.

9. Contribute to FSA

With healthcare costs constantly increasing, you can use a Flexible Spending Account (FSA)  to cover your medical bills and lower your tax bill.

Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is a tax-advantaged savings account offered through your employer. The FSA allows you to save pretax dollars to cover medical and dental expenses for yourself and your dependents. 

The maximum contribution for 2022 is $2,850 per person. If you are married, your spouse can save another $2,850 for a total of $5,700 per family. Some employers offer a matching FSA contribution for up to $500. Typically,  you must use your FSA savings by the end of the calendar year. However, for 2022, the maximum carryover amount is $570

Dependent Care FSA (DC-FSA)

A Dependent Care FSA  is a pretax benefit account that you can use to pay for eligible dependent care services, such as preschool, summer day camp, before or after-school programs, and child or adult daycare. It’s easy to reduce your tax bill while taking care of your children and loved ones while you continue to work.

The American Rescue Plan Act (ARPA) raised pretax contribution limits for dependent care flexible spending accounts (DC-FSAs) for 2022.   For married couples filing jointly or single parents filing as head of household, the maximum contribution limit is $5,000. 

10. Buy an electric vehicle

if you purchase an electric vehicle with a final assembly in North America, you might be eligible for a Federal tax credit. Many states have separate incentives.  The maximum credit is $7,000 depending on your income, the size of the vehicle, and its battery capacity. All eligible models are subject to a 200,000 EV credit cap. Most Tesla, Bold, and GM have reached the cap. For the most recent list check the US Department of Energy website.

11. Contribute to Health Savings Account (HSA)

A Health Savings Account (HSA) is an investment account for individuals under a High Deductible Health Plan (HDHP) that allows you to save money on a pretax basis to pay for eligible medical expenses.

Keep in mind that the HSA has three distinct tax advantages.

  1. All HSA contributions are tax-deductible and will lower your tax bill.
  2. Your investments grow tax-free. You will not pay taxes on dividends, interest, and capital gains.
  3. If you use the account for eligible medical expenses, you don’t pay taxes on those withdrawals.

The qualified High Deductible Plan typically covers only preventive services before the deductible. To qualify for the HSA, the HDHP should have a minimum deductible of $1,400 for an individual and $2,800 for a family. Additionally, your HDHP must have an out-of-pocket maximum of up to $7,050 for one-person coverage or $14,100 for families.

The maximum contributions in HSA for 2022 are $3,650 for individual coverage and $7,300 for families HSA participants who are 55 or older can contribute an additional $1,000 as a catch-up contribution. Unlike the FSA, the HSA doesn’t have a spending limit, and you can carry over the savings in the next calendar year.

12. Defer or accelerate income

Is 2022 shaping to be a high income for you? Perhaps, you can defer some of your income from this calendar year into 2022 and beyond. This move will allow you to avoid or delay higher income taxes. Even though it’s not always possible to defer wages, you might be able to postpone a large bonus, royalty, capital gains, or one-time payment. Remember, it only makes sense to defer income if you expect to be in a lower tax bracket next year.

On the other hand, if you expect to be in a higher tax bracket tax year next year, you may consider taking as much income as possible in 2022.

Tax brackets for 2022

Income Tax Brackets for 2022

There are seven federal tax brackets for the 2022 tax year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Every year the IRS modifies the tax brackets for inflation. Your specific bracket depends on your taxable income and filing status. These are the rates for taxes due in April 2023.

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Marginal tax rate

The marginal tax rate is the highest tax rate you have to pay for every additional dollar of income you earn. A 25% marginal tax rate means that you will pay 25 cents of every extra dollar you report on your earnings.

Effective Tax Rate

The effective tax rate is your total tax amount divided by your total earned income.

Single Filers Tax Brackets for 2022

Tax rate Taxable income bracket Your taxes
10% $0 to $10,275 10% of taxable income
12% $10,276 to $41,775 $1,027.50 plus 12% of the amount over $10,275
22% $41,776 to $89,075 $4,807.50 plus 22% of the amount over $41,775
24% $89,076 to $170,050 $15,213.50 plus 24% of the amount over $89,075
32% $170,051 to $215,950 $34,647.50 plus 32% of the amount over $170,050
35% $215,951 to $539,900 $49,335.50 plus 35% of the amount over $215,950
37% $539,901 or more $162,718 plus 37% of the amount over $539,900

Married Filing Jointly Tax Brackets for 2022

Tax rate Taxable income bracket Your taxes
10% $0 to $20,550 10% of taxable income
12% $20,551 to $83,550 $2,055 plus 12% of the amount over $20,550
22% $83,551 to $178,150 $9,615 plus 22% of the amount over $83,550
24% $178,151 to $340,100 $30,427 plus 24% of the amount over $178,150
32% $340,101 to $431,900 $69,295 plus 32% of the amount over $340,100
35% $431,901 to $647,850 $98,671 plus 35% of the amount over $431,900
37% $647,851 or more $174,253.50 plus 37% of the amount over $647,850

Married Filing Separately Tax Brackets for 2022

Tax rate Taxable income bracket Your taxes
10% $0 to $10,275 10% of taxable income
12% $10,276 to $41,775 $1,027.50 plus 12% of the amount over $10,275
22% $41,776 to $89,075 $4,807.50 plus 22% of the amount over $41,775
24% $89,076 to $170,050 $15,213.50 plus 24% of the amount over $89,075
32% $170,051 to $215,950 $34,647.50 plus 32% of the amount over $170,050
35% $215,951 to $323,925 $49,335.50 plus 35% of the amount over $215,950
37% $323,926 or more $87,126.75 plus 37% of the amount over $323,925

Head of Household Tax Brackets for 2022

Tax rate Taxable income bracket Your Taxes
10% $0 to $14,650 10% of taxable income
12% $14,651 to $55,900 $1,465 plus 12% of the amount over $14,650
22% $55,901 to $89,050 $6,415 plus 22% of the amount over $55,900
24% $89,051 to $170,050 $13,708 plus 24% of the amount over $89,050
32% $170,051 to $215,950 $33,148 plus 32% of the amount over $170,050
35% $215,951 to $539,900 $47,836 plus 35% of the amount over $215,950
37% $539,901 or more $161,218.50 plus 37% of the amount over $539,900

2022 Standard Deduction

The amount of the standard deduction reduces your taxable income. Usually, the IRS adjusts the standard deduction for inflation every year.

When you file your taxes, you have the option to choose a standard deduction or itemized deductions. It only makes sense to itemize your deductions if their total value is higher than the standard deduction.

 

Filing Status Deduction Amount
Single $12,950
Married Filing Jointly $25,900
Head of Household $19,400

Long-term capital gain taxes

You owe a capital gains tax on the profit made from selling capital assets such as stocks, options, bonds, real estate, and cryptocurrencies. Long-term capital gains have a more favorable tax treatment than your ordinary taxable income. To qualify for the long-term status, you must realize a profit on an investment after holding it for one calendar year or 365 days. Short-term capital gains are taxable as ordinary income

Taxable Income Over
Tax Rate Single Married Filing Jointly Head of Household
0% $0 $0 $0
15% $41,675 $83,350 $55,800
20% $459,750 $517,200 $488,500

Net Investment Income tax

Net Investment income tax of 3.8% applies to all taxpayers with net investment income above specific threshold amounts. In general, net investment income includes

  • Long Term Capital gains
  • Short capital gains
  • Dividends
  • Taxable interest
  • Rental and royalty income
  • Passive income from investments you don’t actively participate in
  • Business income from trading financial instruments or commodities
  • The taxable portion of nonqualified annuity payments

You will pay 3.8% of the smaller value between

  1. Your total net investment income, or
  2. the excess of modified adjusted gross income over the following threshold amounts:
  • $200,000 for single and head of household filers
  • $250,000 for married filing jointly or qualifying widow(er)
  • $125,000 for married filing separately

Achieving tax alpha and higher after tax returns on your investments

Achieving Tax Alpha

What is tax alpha?

Tax Alpha is the ability to achieve an additional return on your investments by taking advantage of a wide range of tax strategies as part of your comprehensive wealth management and financial planning.  As you know, it is not about how much you make but how much you keep. And tax alpha measures the efficiency of your tax strategy and the incremental benefit to your after-tax returns.

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Why is tax alpha important to you?

The US has one of the most complex tax systems in the world. Navigating through all the tax rules and changes can quickly turn into a full-time job. Furthermore, the US budget deficit is growing exponentially every year. The government expenses are rising. The only way to fund the budget gap is by increasing taxes, both for corporations and individuals.

Obviously, our taxes pay our teachers, police officers, and firefighters, fund essential services, build new schools and fix our infrastructure. Our taxes help the world around us humming.  However, there will be times when taxes become a hurdle in your decision process. Taxes turn into a complex web of rules that is hard to understand and even harder to implement.

Achieving tax alpha is critical whether you are a novice or seasoned investor sitting on significant investment gains.  Making intelligent and well-informed decisions can help you improve the after-tax return of your investment in the long run.

Assuming that you can generate 1% in excess annual after-tax returns over 30-year, your will investments can grow as much as 32% in total dollar amount.

Tax alpha returns
Tax alpha returns

1. Holistic Financial Planning

For our firm, achieving Tax Alpha is a process that starts on day 1. Making smart tax decisions is at the core of our service. Preparing you for your big day is not a race. It’s a marathon.  It takes years of careful planning and patience. There will be uncertainty. Perhaps tax laws can change. Your circumstances may evolve. Whatever happens, It’s important to stay objective, disciplined, and proactive in preparing for different outcomes.

At our firm, we craft a comprehensive strategy that will maximize your financial outcome and lower your taxes in the long run. We start by taking a complete picture of your financial life and offer a road map to optimize your tax outcome. Achieving higher tax alpha only works in combination with your holistic financial plan. Whether you are planning for your retirement, owning a large number of stock options, or expecting a small windfall, planning your future taxes is quintessential for your financial success.

2. Tax Loss Harvesting

Tax-loss harvesting is an investment strategy that allows you to sell off assets that have declined in value to offset current or future gains from other sources. You can then replace this asset with a similar but identical investment to position yourself for future price recovery. Furthermore, you can use up to $3,000 of capital losses as a tax deduction to your ordinary income. Finally, you can carry forward any remaining losses for future tax years.

The real economic value of tax-loss harvesting lies in your ability to defer taxes into the future. You can think of tax-loss harvesting as an interest-free loan by the government, which you will pay off only after realizing capital gains.  Therefore, the ability to generate long-term compounding returns on TLH strategy can appeal to disciplined long-term investors with low to moderate trading practices.

How does tax-loss harvesting work?

Example: An investor owns 1,000 shares of company ABC, which she bought at $50 in her taxable account. The total cost of the purchase was $50,000. During a market sell-off a few months later, the stock drops to $40, and the initial investment is now worth $40,000.

Now the investor has two options. She can keep the stock and hope that the price will rebound. Alternatively,  she could sell the stock and realize a loss of $10,000. After the sale, she will have two options. She can either buy another stock with a similar risk profile or wait 30 days and repurchase ABC stock with the proceeds. By selling the shares of ABC, the investor will realize a capital loss of $10,000. Assuming she is paying 15% tax on capital gains, the tax benefit of the loss is equal to $1,500.  Furthermore, she can use the loss to offset future gains in her investment portfolio or other sources.

3. Direct Indexing

Direct indexing is a type of index investing. It combines the concepts of passive investing and tax-loss harvesting. The strategy relies on the purchase of a custom investment portfolio that mirrors the composition of an index.

Similar to buying an index fund or an ETF, direct indexing requires purchasing a broad basket of individual stocks that closely track the underlying index.  For example, if you want to create a portfolio that tracks S&P 500, you can buy all or a smaller number of  500 stocks inside the benchmark.

Owning a basket of individual securities offers you greater flexibility to customize your portfolio.  First, you can benefit from tax-loss harvesting opportunities by replacing stocks that have declined in value with other companies in the same category. Second, you can remove undesirable stocks or sectors you otherwise can’t do when buying an index fund or an ETF. Third, direct indexing can allow you to diversify your existing portfolio and defer realizing capital gains, especially when you hold significant holdings with a low-cost basis.

4. Tax Location

Tax location is a strategy that places your diversified investment portfolio according to each investment’s risk and tax profile. In the US, we have a wide range of investment and retirement accounts with various tax treatments. Individual investment accounts are fully taxable for capital gains and dividends. Employer 401k, SEP IRA and Traditional IRA are tax-differed savings vehicles. Your contributions are tax-deductible while your savings grow tax-free. You only pay taxes on your actual retirement withdrawals. Finally, Roth IRA, Roth 401k, and 529 require pre-tax contributions, but all your future earnings are tax-exempt. Most of our clients will have at least two or more of these different instrument vehicles.

Now, enter stocks, bonds, commodities, REITs, cryptocurrencies, hedge funds, private investments, stock options, etc. Each investment type has a different tax profile and carries a unique level of risk.

At our firm, we create a customized asset allocation for every client, depending on their circumstances and goals. Considering the tax implications of each asset in each investment or retirement account, we carefully create our tax location strategy to take advantage of any opportunities to achieve tax alpha.

5. Smart tax investing

Smart tax investing is a personalized investment strategy that combines various portfolio management techniques such as tax-loss harvesting, asset allocation, asset location, diversification, dollar-cost averaging, passive vs. active investing, and rebalancing.  The main focus of tax-mindful investing is achieving a higher after-tax return on your investment portfolio. Combined with your comprehensive financial planning, smart-tax investing can be a powerful tool to elevate your financial outcome.

Tax Saving Ideas for 2021

Tax Saving ideas for 2021

As we approach the end of  2021, I am sharing my favorite list of tax-saving ideas that can help you lower your tax bill for 2021. In my practice, In the US tax rules change frequently. 2021 was no exception.

I believe that proactive tax planning is essential for achieving your financial goals. Furthermore, it is key to achieving tax alpha.  For you,  achieving Tax Alpha is a process that starts on day 1.  Making smart tax decisions can help you grow your wealth while you prepared for various outcomes. 

Today, you have a great opportunity to review your finances. You can make several smart and easy tax moves that can lower your tax bill and increase your tax refund. Being ahead of the curve will help you make well-informed decisions without the stress of tax deadlines. Start the conversation today. 

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1. Know your tax bracket

The first step of managing your taxes is knowing your tax bracket. In 2021, federal tax rates fall into the following brackets depending upon your taxable income and filing status. Knowing where you land on the tax scale can help you make informed decisions especially when you plan to earn additional income, exercise stock options, or receive RSUs

Here are the Federal tax bracket and rates for 2021.

Tax Rate Taxable Income Taxable Income
  (Single) (Married Filing Jointly)
10% Up to $9,950 Up to $19,900
12% $9,951 to $40,525 $19,901 to $81,050
22% $40,526 to $86,375 $81,051 to $172,750
24% $86,376 to $164,925 $172,751 to $329,850
32% $164,926 to $209,425 $329,851 to $418,850
35% $209,426 to $523,600 $418,851 to $628,300
37% $523,601 or more $628,301 or more

2. Decide to itemize or use a standard deduction

The standard deduction is a specific dollar amount that allows you to reduce your taxable income. Nearly 90% of all tax filers use the standard deduction instead of itemizing. It makes the process a lot simpler for many Americans. However, in some circumstances, your itemized deductions may surpass the dollar amount of the standard deduction and allow you to lower your tax bill even further.

Here are the values for 2021:

Filing status 2021 tax year
Single $12,550
Married, filing jointly $25,100
Married, filing separately $12,550
Head of household $18,800

3. Maximize your retirement contributions

You can save taxes by contributing to a retirement plan. Most contributions to qualified retirement plans are tax-deductible and will lower your tax bill.

  • For employees – 401k, 403b, 457, and TSP. The maximum contribution to qualified employee retirement plans for 2021 is $19,500. If you are at the age of 50 or older, you can contribute an additional $6,500.
  • For business owners – SEP IRA, Solo 401k, and Defined Benefit Plan. Business owners can contribute to SEP IRA, Solo 401k, and Defined Benefit Plans to maximize your retirement savings and lower your tax bill. The maximum contribution to SEP-IRA and Solo 401k in 2021 is $58,000 or $64,500 if you are 50 and older.

If you own SEP IRA, you can contribute up to 25% of your business wages.

In a solo 401k plan, you can contribute as both an employee and an employer. The employee contribution is subject to a $19,500 limit plus a $6,500 catch-up. The employer match is limited to 25% of your compensation for a maximum of $38,500. In many cases, the solo 401k plan can allow you to save more than SEP IRA.

A defined Benefit Plan is an option for high-income earners who want to save more aggressively for retirement above the SEP-IRA and 401k limits. The DB plan uses actuary rules to calculate your annual contribution limits based on your age and compensation. All contributions to your defined benefit plan are tax-deductible, and the earnings grow tax-free.

4. Convert to Roth IRA

Transferring investments from a Traditional IRA or 401k plan to a Roth IRA is known as Roth Conversion. It allows you to switch from tax-deferred to tax-exempt retirement savings.

The conversion amount is taxable for income purposes. The good news is that even though you will pay more taxes in the current year, the conversion may save you a lot more money in the long run.

If you believe that your taxes will go up in the future, Roth Conversion could be a very effective way to manage your future taxes. 

5. Contribute to a 529 plan

The 529 plan is a tax-advantaged state-sponsored investment plan, allowing parents to save for their children’s future college expenses. 529 plan works similarly to the Roth IRA. You make post-tax contributions. Your investment earnings grow free from federal and state income tax if you use them to pay for qualified educational expenses. Compared to a regular brokerage account, the 529 plan has a distinct tax advantage as you will never pay taxes on your dividends and capital gains.

Over 30 states offer a full or partial tax deduction or a credit on your 529 contributions. You can find the full list here. If you live in any of these states, your 529 contributions can significantly lower your state tax bill.

6. Make a donation

Donations to charities, churches, and various non-profit organizations are tax-deductible. You can support your favorite cause by giving back and lower your tax bill at the same time. Your contributions can be in cash, household good, appreciated assets, or directly from your IRA distributions. 

Charitable donations are tax-deductible only when you itemize your tax return. If you make small contributions throughout the year, you might be better off taking the standard deduction instead.

If itemizing your taxes is crucial for you, you might want to consolidate your donations in one calendar year. So, instead of making multiple charitable contributions over the years, you can give one large donation every few years.

7. Tax-loss harvesting

The stock market can be volatile. If you are holding stocks and other investments that dropped significantly in 2021, you can consider selling them. The process of selling losing investments to reduce your tax liability is known as tax-loss harvesting. It works for capital assets held outside retirement accounts (401k, Traditional IRA, and Roth IRA). Capital assets may include real estate, cryptocurrency, cars, gold, stocks, bonds, and any investment property, not for personal use.

The IRS allows you to use capital losses to offset capital gains. If your capital losses are higher than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year or $1,500 if married and filing a separate return. Furthermore, you can carry forward your capital losses for future years and offset future gains.

8. Prioritize long-term over short-term capital gains

Another way to lower your tax bill when selling assets is to prioritize long-term over short-term capital gains. The current tax code benefits investors who keep their assets for more than one calendar year. Long-term investors receive a preferential tax rate on their gains. While investors with short-term capital gains will pay taxes at their ordinary income tax level

Here are the long-term capital gain tax brackets for 2021:

Long-term capital gains tax rate Single Married Filing Jointly
0% $0 to $40,400 $0 to $80,800
15% $40,401 – $445,850 $80,801 to $501,600
20% Over $445,850 Over $501,601

Furthermore, high-income earners will also pay an additional 3.8% net investment income tax.

9. Contribute to FSA

With healthcare costs always on the rise, you can use a Flexible Spending Account (FSA)  to cover your medical bills and lower your tax bill.

Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is tax-advantaged savings account offered through your employer. The FSA allows you to save pre-tax dollars to cover medical and dental expenses for yourself and your dependents. 

The maximum contribution for 2021 is $2,750 per person. If you are married, your spouse can save another $2,750 for a total of $5,500 per family.  Some employers offer a matching FSA contribution for up to $500. Typically,  you must use your FSA savings by the end of the calendar year. However, for 2021, The American Rescue Plan Act (ARPA) allowed you to carry over your entire balance into the new year.

Dependent Care FSA (DC-FSA)

A Dependent Care FSA  is a pre-tax benefit account that you can use to pay for eligible dependent care services, such as preschool, summer day camp, before or after school programs, and child or adult daycare. It’s an easy way to reduce your tax bill while taking care of your children and loved ones while you continue to work.

The American Rescue Plan Act (ARPA) raised pretax contribution limits for dependent care flexible spending accounts (DC-FSAs) for the calendar year 2021.   For married couples filing jointly or single parents filing as head of household, the maximum contribution limit is $10,500. 

10. Child and dependent care tax credit

The enhanced credit for 2021 allows eligible parents to claim up to 50% of  $8,000 per child in dependent care expenses for a maximum of two children.  The maximum credit will be 50% of $16,000.  Keep in mind that you cannot use your DC-FSA funds to claim this credit

The credit percentage gradually phases down to 20 percent for individuals with incomes between $125,000 and $400,000, and further phases down by 1 percentage point for each $2,000 (or fraction thereof) by which an individual’s adjusted gross income exceeds $400,000,

11.. Contribute to Health Savings Account (HSA)

A Health Savings Account (HSA) is an investment account for individuals under a High Deductible Health Plan (HDHP) that allows you to save money on a pre-tax basis to pay for eligible medical expenses.

Keep in mind that the HSA has three distinct tax advantages.

  1. All HSA contributions are tax-deductible and will lower your tax bill.
  2. Your investments grow tax-free. You will not pay taxes on dividends, interest, and capital gains.
  3. If you use the account for eligible medical expenses, you don’t pay taxes on those withdrawals.

The qualified High Deductible Plan typically covers only preventive services before the deductible. To qualify for the HSA, the HDHP should have a minimum deductible of $1,400 for an individual and $2,800 for a family. Additionally, your HDHP must have an out-of-pocket maximum of up to $7,000 for one-person coverage or $14,000 for family.

The maximum contributions in HSA for 2021 are $3,600 for individual coverage and $7,200 for a family. HSA participants who are 55 or older can contribute an additional $1,000 as a catch-up contribution. Unlike the FSA, the HSA doesn’t have a spending limit, and you can carry over the savings in the next calendar year.

12. Defer or accelerate income

Is 2021 shaping to be a high income for you? Perhaps, you can defer some of your income from this calendar year into 2021 and beyond. This move will allow you to delay some of the income taxes coming with it. Even though it’s not always possible to defer wages, you might be able to postpone a large bonus, royalty, or one-time payment. Remember, it only makes sense to defer income if you expect to be in a lower tax bracket next year.

On the other hand, if you expect to be in a higher tax bracket tax year next year, you may consider taking as much income as possible in 2021.

Tax Saving Moves for 2020

Tax Saving Moves for 2020

As we approach the end year, we share our list of tax-saving moves for 2020. 2020 has been a challenging and eventful year. The global coronavirus outbreak changed the course of modern history. The Pandemic affected many families and small businesses. The stock market crashed in March, and It had a full recovery in just a few months.

With so many changes, now is a great time to review your finances. You can make a few smart and simple tax moves that can lower your tax bill and increase your tax refund.

Whether you file taxes yourself or hire a CPA, it is always better to be proactive. If you expect a large tax bill or your financials have changed substantially, talk to your CPA. Start the conversation today. Don’t wait until the last moment. Being ahead of the curve will help you make well-informed decisions without the stress of tax deadlines.

1. Know your tax bracket

The first step of mastering your taxes is knowing your tax bracket. 2020 is the third year after the TCJA took effect. One of the most significant changes in the tax code was introducing new tax brackets.

Here are the tax bracket and rates for 2020.

Tax Brackets 2020

2. Decide to itemize or use a standard deduction

Another recent change in the tax law was the increase in the standard deduction. The standard deduction is a specific dollar amount that allows you to reduce your taxable income. As a result of this change, nearly 90% of all tax filers will take the standard deduction instead of itemizing. It makes the process a lot simpler for many Americans. Here are the values for 2020:

Filing status 2020 tax year
Single $12,400
Married, filing jointly $24,800
Married, filing separately $12,400
Head of household $18,650

3. Maximize your retirement contributions

You can save taxes by contributing to a retirement plan. Most contributions to qualified retirement plans are tax-deductible and will lower your tax bill.

  • For employees – 401k, 403b, 457, and TSP. The maximum contribution to qualified employee retirement plans for 2020 is $19,500. If you are at the age of 50 or older, you can contribute an additional $6,500.
  • For business owners – SEP IRA, Solo 401k, and Defined Benefit Plan. Business owners can contribute to SEP IRA, Solo 401k, and Defined Benefit Plans to maximize your retirement savings and lower your tax bill. The maximum contribution to SEP-IRA and Solo 401k in 2020 is $57,000 or $63,500 if you are 50 and older.

If you own SEP IRA, you can contribute up to 25% of your business wages.

In a solo 401k plan, you can contribute as both an employee and an employer. The employee contribution is subject to a $19,500 limit plus a $6,500 catch-up. The employer match is limited to 25% of your compensation for a maximum of $37,500. In many cases, the solo 401k plan can allow you to save more than SEP IRA.

Defined Benefit Plans is an option for high-income earners who want to save more aggressively for retirement above the SEP-IRA and 401k limits. The DB plan uses actuary rules to calculate your annual contribution limits based on your age and compensation. All contributions to your defined benefit plan are tax-deductible, and the earnings grow tax-free.

4. Convert to Roth IRA

Transferring investments from a Traditional IRA or 401k plan to a Roth IRA is known as Roth Conversion. It allows you to switch from tax-deferred to tax-exempt retirement savings.

The conversion amount is taxable for income purposes. The good news is that even though you will pay more taxes in the current year, the conversion may save you a lot more money in the long run.

If you believe that your taxes will go up in the future, Roth Conversion could be a very effective way to manage your future taxes. 

5. Contribute to a 529 plan

The 529 plan is a tax-advantaged state-sponsored investment plan, allowing parents to save for their children’s future college expenses. 529 plan works similarly to the Roth IRA. You make post-tax contributions. Your investment earnings grow free from federal and state income tax if you use them to pay for qualified educational expenses. Compared to a regular brokerage account, the 529 plan has a distinct tax advantage as you will never pay taxes on your dividends and capital gains.

Over 30 states offer a full or partial tax deduction or a credit on your 529 contributions. You can find the full list here. If you live in any of these states, your 529 contributions can significantly lower your state tax bill.

6. Make a donation

Donations to charities, churches, and various non-profit organizations are tax-deductible. You can support your favorite cause by giving back and lower your tax bill at the same time.

However, due to the new tax code changes, donations are tax-deductible only when you itemize your tax return. If you make small contributions throughout the year, you will be better off taking the standard deduction.

If itemizing your taxes is crucial for you, you might want to consolidate your donations in one calendar year. So, instead of making multiple charitable contributions over the years, you can give one large donation every few years.

7. Sell losing investments

2020 has been turbulent for the stock market. If you are holding stocks and other investments that dropped significantly in 2020, you can consider selling them. The process of selling losing investments to reduce your tax liability is known as tax-loss harvesting. It works for capital assets held outside retirement accounts (401k, Traditional IRA, and Roth IRA). Capital assets may include real estate, cars, gold, stocks, bonds, and any investment property, not for personal use.

The IRS allows you to use capital losses to offset capital gains. If your capital losses are higher than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year or $1,500 if married and filing a separate return.

8. Prioritize long-term over short-term capital gains

Another way to lower your tax bill when selling assets is to prioritize long-term over short-term capital gains. The current tax code benefits investors who keep their assets for more than one calendar year. Long-term investors receive a preferential tax rate on their gains. While investors with short-term capital gains will pay taxes at their ordinary income tax level

Here are the long-term capital gain tax brackets for 2020:

Long-Term Capital Gains Tax Rate Single Filers (Taxable Income) Married Filing Separately
0% $0-$40,000 $0-$40,000
15% $40,000-$441,450 $40,000-$248,300
20% Over $441,550 Over $248,300

High-income earners will also pay an additional 3.8% net investment income tax.

9. Contribute to FSA and HSA

With healthcare costs always on the rise, you can use a Flexible Spending Account (FSA) or a Health Savings Account (HSA) to cover your medical bills and lower your tax bill.

Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is tax-advantaged savings account offered through your employer. The FSA allows you to save pre-tax dollars to cover medical and dental expenses for yourself and your dependents. The maximum contribution for 2020 is $2,750 per person. If you are married, your spouse can save another $2,750 for a total of $5,500 per family.  Some employers offer a matching FSA contribution for up to $500. Typically, it would help if you used your FSA savings by the end of the calendar year. However, the IRS allows you to carry over up to $500 balance into the new year.

Dependent Care FSA (CSFSA)

A Dependent Care FSA (CSFSA) is a pre-tax benefit account that you can use to pay for eligible dependent care services, such as preschool, summer day camp, before or after school programs, and child or adult daycare. It’s an easy way to reduce your tax bill while taking care of your children and loved ones while you continue to work. The maximum contribution limit for 2020 for an individual who is married but filing separately is $2,500. For married couples filing jointly or single parents filing as head of household, the limit is $5,000.

Health Savings Account (HSA)

A Health Savings Account (HSA) is an investment account for individuals under a High Deductible Health Plan (HDHP) that allows you to save money on a pre-tax basis to pay for eligible medical expenses. The qualified High Deductible Plan typically covers only preventive services before the deductible. To qualify for the HSA, the HDHP should have a minimum deductible of $1,400 for an individual and $2,800 for a family. Additionally, your HDHP must have an out-of-pocket maximum of up to $6,900 for one-person coverage or $13,800 for family.

The maximum contributions in HSA for 2020 are $3,550 for individual coverage and $7,100 for a family. HSA participants who are 55 or older can contribute an additional $1,000 as a catch-up contribution. Unlike the FSA, the HSA doesn’t have a spending limit, and you can carry over the savings in the next calendar year.

Keep in mind that the HSA has three distinct tax advantages. First, all HSA contributions are tax-deductible and will lower your tax bill. Second, you will not pay taxes on dividends, interest, and capital gains. Third, if you use the account for eligible expenses, you don’t pay taxes on those withdrawals.

10. Defer income

Is 2020 shaping to be a high income for you? Perhaps, you can defer some of your income from this calendar year into 2021 and beyond. This move will allow you to delay some of the income taxes coming with it. Even though it’s not always possible to defer wages, you might be able to postpone a large bonus, royalty, or one-time payment. Remember, it only makes sense to defer income if you expect to be in a lower tax bracket next year.

On the other hand, if you expect to be in a higher tax bracket tax year next year, you may consider taking as much income as possible in 2020.

11. Skip RMDs

Are you taking the required minimum distributions (RMD) from your IRA or 401k plan? The CARES Act allows retirees to skip their RMD in 2020. If you don’t need the extra income, you can skip your annual distribution. This move will lower your taxes for 2020 and may cut your future Medicare cost.

12. Receive employee retention tax credit for eligible businesses

The CARES Act granted employee retention credits for eligible businesses affected by the Coronavirus pandemic. The credit amount equals 50% of eligible employee wages paid by an eligible employer in a 2020 calendar quarter. The credit is subject to an overall wage cap of $10,000 per eligible employee.

Qualifying businesses must fall into one of two categories:

  • The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
  • The employer’s gross receipts were below 50% of the comparable quarter in 2019. Once the employer’s gross receipts went above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

 

12 End of Year Tax Saving Tips

end of year tax saving tips

As we approach the close of 2019, we share our list of 12 end of year tax saving tips. Now is a great time to review your finances. You can make several smart and simple tax moves that can help lower your tax bill and increase your tax refund.

The Tax Cuts and Jobs Act of 2017 made sweeping changes in the tax code that affected many families and small business owners. If the previous tax season caught you off-guard, now you have a chance to redeem yourself.

Whether you file taxes yourself or hire a CPA, it is always better to be proactive. If you are expecting a large tax bill or your financials have changed substantially since last year, talk to your CPA. Start the conversation. Don’t wait until the last moment. Being ahead of the curve will help you make well-informed decisions without the stress of tax deadlines.

1. Know your tax bracket

The first step of mastering your taxes is knowing your tax bracket. 2019 is the second year after the TCJA took effect. One of the most significant changes in the tax code was introducing new tax brackets.

Here are the tax bracket and rates for 2019.

End of Year Tax Tips

2. Decide to itemize or use a standard deduction

Another big change in the tax law was the increase in the standard deduction. The standard deduction is a specific dollar amount that allows you to reduce your taxable income. As a result of this change, nearly 90% of all tax filers will take the standard deduction instead of itemizing. It makes the process a lot simpler for many Americans. Here are the values for 2019:

End of Year Tax Tips

3. Maximize your retirement contributions

Most contributions to qualified retirement plans are tax-deductible and will lower your tax bill.

  • For employees – 401k, 403b, 457 and TSP. The maximum contribution to qualified employee retirement plans for 2019 is $19,000. If you are at the age of 50 or older, you can contribute an additional $6,000.
  • For business owners – SEP IRA, Solo 401k and Defined Benefit Plan. Business owners can contribute to SEP IRA, Solo 401k, and Defined Benefits plans to maximize your retirement savings and lower your tax bill. The maximum contribution to SEP-IRA and Solo 401k in 2019 is $56,000 or $62,000 if you are 50 and older.

If you own SEP IRA, you can contribute up 25% of your business wages.

In a solo 401k plan, you can contribute as both an employee and an employer. The employee contribution is subject to a $19,000 limit plus a $6,000 catch-up. The employer match is limited to 25% of your compensation for the maximum $37,000. Depending on how you pay yourself, sometimes solo 401k can allow you for more savings than SEP IRA.

Defined Benefit Plans is an option for high-income earners who want to save more aggressively for retirement above the SEP-IRA and 401k limits. The DB plan uses actuary rules to calculate your annual contribution limits based on your age and compensation. All contributions to your defined benefit plan are tax-deductible, and the earnings grow tax-free.

4. Convert to Roth IRA

The process of transferring assets from a Traditional IRA or 401k plan to a Roth IRA is known as Roth Conversion. It allows you to switch from tax-deferred to tax-exempt retirement savings. You can learn more about the benefits of Roth IRA here.

The conversion amount is taxable for income purposes. The good news is that even though you will pay higher taxes in the current year, it may save you a lot more money in the long run.

While individual circumstances may vary, Roth Conversion could be very effective in a year with low or no income. Talk to your accountant or financial advisor. Ask if Roth conversion makes sense for you.

5. Contribute to a 529 plan

The 529 plan is a tax-advantaged state-sponsored investment plan, which allows parents to save for their children’s future college expenses. 529 plan works similarly to the Roth IRA. You make post-tax contributions. Your investment earnings grow free from federal and state income tax if you use them to pay for qualified educational expenses. Compared to a regular brokerage account, the 529 plan has a distinct tax advantage as you will never pay taxes on your dividends and capital gains.

Over 30 states offer a full or partial tax deduction or a credit on your 529 contributions. You can find the full list here. If you live in any of these states, your 529 contributions can lower your state tax bill significantly.

6. Make a donation

Donations to charities, churches, and various non-profit organizations are tax-deductible. You can support your favorite cause by giving back and lower your tax bill at the same time.

However, due to the changes in the new tax code, donations are tax-deductible only when you itemize your tax return. If you make small contributions throughout the year, you probably will be better off taking the standard deduction.

If itemizing your taxes is crucial for you, then you might want to consolidate your donations in one calendar year. So, instead of making multiple charitable contributions over the years, you can give one large donation every few years.

7. Sell losing investments

The process of selling losing investments to reduce your tax liability is known as tax-loss harvesting. It works for capital assets held outside retirement accounts (such as 401k, Traditional IRA, and Roth IRA). Capital assets may include real estate, cars, gold, stocks, bonds, and any investment property, not for personal use.

The IRS allows you to use capital losses to offset capital gains. If your capital losses are higher than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year or $1,500 if married and filing a separate return.

8. Prioritize long-term over short-term capital gains

Another way to lower your tax bill when selling assets is to prioritize long-term over short-term capital gains. The current tax code benefits investors who keep their assets for more than one calendar year. Long-term investors receive a preferential tax rate on their gains. While investors with short-term capital gains will pay taxes at their ordinary income tax level

Here are the long-term capital gain tax brackets for 2019:

End of Year Tax Tips

High-income earners will also pay an additional 3.8% net investment income tax.

9. Take advantage of FSA and HSA

With healthcare costs always on the rise, you can use a Flexible Spending Account (FSA) or a Health Savings Account (HSA) to cover your medical bills and lower your tax bill.

Flexible Spending Account (FSA)

A Flexible Spending Account (FSA) is a tax-advantaged savings account offered through your employer. The FSA allows you to save pre-tax dollars to cover medical and dental expenses for yourself and your dependents. The maximum contribution for 2019 is $2,700 per person. If you are married, your spouse can save another $2,700 for a total of $5,400 per family. Typically, you should use your FSA savings by the end of the calendar year. However, the IRS allows you to carry over up to $500 balance into the new year.

Dependent Care FSA (CSFSA)

A Dependent Care FSA (CSFSA) is a pre-tax benefit account that you can use to pay for eligible dependent care services, such as preschool, summer day camp, before or after school programs, and child or adult daycare. It’s an easy way to reduce your tax bill while taking care of your children and loved ones while you continue to work. The maximum contribution limit for 2019 for an individual who is married but filing separately is $2,500. For married couples filing jointly or single parents filing as head of household, the limit is $5,000.

Health Savings Account (HSA)

A Health Savings Account (HSA) is an investment account for individuals under a High Deductible Health Plan (HDHP) that allows you to save money on a pre-tax basis to pay for eligible medical expenses.The qualified High Deductible Plan typically covers only preventive services before the deductible. To qualify for the HSA, the HDHP should have a minimum deductible of $1,350 for an individual and $2,700 for a family. Additionally, your HDHP must have an out-of-pocket maximum of up to $6,750 for one-person coverage or $13,500 for family.

The maximum contributions in HSA for 2019, are $3,500 for self-only coverage and $7,000 for a family. HSA participants who are 55 or older can contribute an additional $1,000 as a catch-up contribution. Unlike the FSA, the HSA doesn’t have a spending limit, and you can carry over the savings in the next calendar year.

Keep in mind that the HSA has three distinct tax advantages. First, all HSA contributions are tax-deductible and will lower your tax bill. Second, you will not pay taxes on dividends, interest, and capital gains. Third, if you use the account for eligible expenses, you don’t pay taxes on those withdrawals either.

10. Defer income

Deferring income from this calendar year into the next year will allow you to delay some of the income taxes coming with it. Even though it’s not always possible to defer wages, you might be able to postpone a large bonus, royalty, or onetime payment. Remember, it only makes sense to defer income if you expect to be in a lower tax bracket next year.

Reversely, if you are expecting to be in a higher tax bracket tax year next year, you may consider taking as much income as possible in this tax year.

11. Buy Municipal Bonds

Municipal bonds are issued by local governments, school districts, and authorities to fund local projects that will benefit the general public. The interest income from most municipal bonds is tax-free. Investors in these bonds are exempt from federal income tax. If you buy municipal bonds issued in the same state where you live, you will be exempt from state taxes as well.

12. Take advantage of the 199A Deduction for Business Owners

If you are a business owner or have a side business, you might be able to use the 20% deduction on qualified business income. The TCJA established a new tax deduction for small business owners of pass-through entities like LLCs, Partnerships, S-Corps, and sole-proprietors. While the spirit of the law is to support small business owners, the rules of using this deduction are quite complicated and restrictive. For more information, you can check the IRS page. In summary, qualified business income must be related to conducting business or trade within the United States or Puerto Rico. The tax code also separates the business entities by industry – Qualified trades or businesses and Specified service trades or businesses.

Qualified versus specified service trade

Specified service businesses include the following trades: Health (e.g., physicians, nurses, dentists, and other similar healthcare professionals), Law, Accounting, Actuarial science, Performing arts, Consulting, Athletics, and Financial Services. Qualified trades or businesses is everything else.

For “specified service business,” the deduction gets phased out between $315,000 and $415,000 for joint filers. For single filers, the phase-out range is $157,500 to $207,500.

The qualified trades and businesses are also subject to the same phaseout limits. However, if their income is above the threshold, the 199A deduction becomes the lesser of the 20% of qualified business income deduction or the greater of either 50 percent of the W-2 wages of the business, or the sum of 25% of the W-2 wages of the business and 2.5% of the unadjusted basis immediately after acquisition of all qualified property.

If this all sounds very complicated to you, it’s because it is complicated.Contact your accountant or tax adviser to see if you can take advantage of this deduction.

9 Smart Tax Saving Strategies for High Net Worth Individuals

9 Smart Tax Saving Strategies for High Net Worth Individuals

The Tax Cuts and Jobs Act (TCJA) voted by Congress in late 2017 introduced significant changes to the way high net worth individuals and families file and pay their taxes. The key changes included the doubling of the standard deduction to $12,000 for singles and $24,000 for married couples filing jointly, the elimination of personal exemptions, limiting the SALT deduction to $10,000, limiting the home mortgage interest deduction to loans of up to $750,000 versus $1,000,000 as well as comprehensive changes to itemized deductions and Alternative Minimum Tax.

Many high net worth individuals and families, especially from high tax states like California, New York, and New Jersey, will see substantial changes in their tax returns. The real impact won’t be completely revealed until the first tax filing in 2019. Many areas remain ambiguous and will require further clarification by the IRS.

Most strategies discussed in this article were popular even before the TCJA. However, their use will vary significantly from person to person.  I strongly encourage you to speak with your accountant, tax advisor, or investment advisor to better address your concerns.

1. Home mortgage deduction

While a mortgage tax deduction is rarely the primary reason to buy a home, many new home buyers will have to be mindful of the new tax rule limiting mortgage deductions to loans of up to $750,000. The interest on second home mortgages is no longer tax-deductible.  The interest on Home Equity Loans or HELOCs could be tax-deductible in some instances where proceeds are utilized to acquire or improve a property

2. Get Incorporated

If you own a business, you may qualify for a 20 percent deduction for qualified business income. This break is available to pass-through entities, including S-corporations and limited liability companies. In general, to qualify for the full deduction, your taxable income must be below $157,500 if you’re single or $315,000 if you’re married and file jointly. Beyond those thresholds, the TJLA sets limits on what professions can qualify for this deduction. Entrepreneurs with service businesses — including doctors, attorneys, and financial advisors — may not be able to take advantage of the deduction if their income is too high.

Furthermore, if you own a second home, you may want to convert it to a rental and run it as a side business. This could allow you to use certain tax deductions that are otherwise not available.

Running your business from home is another way to deduct certain expenses (internet, rent, phone, etc.). In our digital age, technology makes it easy to reach out to potential customers and run a successful business out of your home office.

3. Charitable donations

All contributions to religious, educational, or charitable organizations approved by the IRS are tax-deductible. The annual limit is 50% of your AGI (aggregate gross income) for most donations and 30% of AGI for appreciated assets.

While most often people choose to give money, you can also donate household items, clothes, cars, airline miles, investments, and real estate. The fair value of the donated items decreases your taxable income and therefore will reduce the amount of taxes due to IRS.

The TCJA made the tax planning for donations a little bit trickier. The new tax rules raised the standard deduction to $12,000 for singles and $24,000 for married couples filing jointly. In effect, the rule will reduce the number of people who are itemizing their taxes and make charitable donations a less attractive tax strategy.

For philanthropic high net worth individuals making charitable donations could require a little more planning to achieve the highest possible tax benefit. One viable strategy is to consolidate annual contributions into a single large payment. This strategy will ensure that your donations will go above the yearly standard deduction threshold.

Another approach is to donate appreciated investments, including stocks and real estate. This strategy allows philanthropic investors to avoid paying significant capital gain tax on low-cost basis investments. To learn more about the benefits of charitable donations, check out my prior post here.

4. Gifts

The TCJA doubled the gift and estate tax exemption to almost $11.18 million per person and $22.36 per married couple. Furthermore, you can give up to $15,000 to any number of people every year without any tax implications. Amounts over $15,000 are subject to the combined gift and estate tax exemption of $11 million.  You can give your child or any person within the annual limits without creating create any tax implications.

Making a gift will not reduce your current year taxes. However, making gifts of appreciated assets with a lower cost basis can be a way to manage your future tax payments and pass on the tax bill to family members who pay a lower tax rate.

5. 529 Plans

The TCJA of 2017 expanded the use of 529 plans to cover qualifying expenses for private, public, and religious kindergarten through 12th grade. Previously parents and grandparents could only use 529 funds for qualified college expenses.

The use of 529 plans is one of the best examples of how gifts can minimize your future tax burden. Parents and grandparents can contribute up to $15,000 annually per person, $30,000 per married couple into their child college education fund. The plan even allows a one–time lump-sum payment of $75,000 (5 years x $15,000).

Parents can choose to invest their contributions through a variety of investment vehicles.  While 529 contributions are not tax-deductible on a federal level, many states like New York, Massachusetts, Illinois, etc. allow for state tax deductions for up to a certain amount. The 529 investments grow tax-free. Withdrawals are also tax-free when used to pay cover qualified college and educational expenses. 

6. 401k Contributions

One of the most popular tax deductions is the tax-deferred contribution to 401k and 403b plans. In 2020 the allowed maximum contribution per person is $19,500 plus an additional $6,500 catch-up for investors at age 50 and older. Also, your employer can contribute up to $36,500 for a maximum annual contribution of $57,000 or $63,500 if you are older than 50.

The contributions to your retirement plan are tax-deductible. They decrease your taxable income if you use itemized deductions on your tax filing form. Not only that, but the investments in your 401k portfolio also grow tax-free. You will owe taxes upon withdrawal at your current tax rate at that time.

7. Roth IRA

Roth IRA is a great investment vehicle. Investors can contribute up to $6,000 per year. All contributions to the account are after-tax.  The investments in the Roth IRA can grow tax-free. And the withdrawals will be tax-exempt if held till retirement. IRS has limited the direct contributions to individuals making up to $124,000 per year with a phase-out at $139,000. Married couples can make contributions if their income is up to $196,000 per year with a phase-out at $206,000.

Fortunately, recent IRS rulings made it possible for high net worth individuals to make Roth Contributions.  Using the two-step process known as backdoor Roth you can take advantage of the long-term tax-exempt benefits of Roth IRA. Learn more about Roth IRA in our previous post here. 

8. Health Spending Account

A health savings account (HSA) is a tax-exempt saving account available to taxpayers who are enrolled in a high-deductible health plan (HDHP) The funds contributed to this account are tax-deductible. Unlike a flexible spending account (FSA), HSA funds roll over and accumulate year over year if not spent. HSA owners can use the funds to pay for qualified medical expenses at any time without tax liability or penalty. The annual contribution limits for 2018 are $3,450 per person, $6,900 per family, and an additional $1,000 if 55 or older. The owner of HSA can invest the funds similar to the IRA account.

In effect, HSAs have a triple tax benefit. All contributions are tax-deductible. Investments grow tax-free and. HSA owners can make tax-free withdrawals for qualified medical expenses.

9. Municipal bonds

Old fashioned municipal bonds continue to be an attractive investment choice of high net worth individuals. The interest income from municipal bonds is still tax-exempt on a federal level. When the bondholders reside in the same state as the bond issuer, they can be exempted from state income taxes as well.

Final words

If you have any questions about your existing investment portfolio, reach out to me at [email protected] or +925-448-9880.

You can also visit our Insights page where you can find helpful articles and resources on how to make better financial and investment decisions.

14 Effective ways to take control of your taxes

In this blog post, I will go over several popular and some not so obvious tax deductions and strategies that can help you decrease your annual tax burden. Let’s be honest.  Nobody wants to pay taxes. However, taxes are necessary to pay for pensions, social services, Medicaid, roads, police, law enforcement and so on. Most people will earn a higher income and grow their investments portfolios as their approach retirement. Thus they will gradually move to higher tax brackets and face a higher tax bill at the end of the year. IRS provides many tax deductions and breaks that can help you manage your tax burden. Taking advantage of these tax rules can help you reduce your current or future your tax bill.

These are general rules. I realize that we all face different circumstances. Use them as a broad guideline. Your particular situation may require a second opinion by an accountant, a tax lawyer or an investment advisor.

Learn more about our Private Client Services

 

1. Primary residence mortgage deductions

Buying a first home is a big decision. Your new neighborhood, school district, nearby services are all critical factors you need to consider before making your choice. If you own a primary residence (sorry, a vacation home in Hawaii doesn’t count), you can deduct the interest on your mortgage loan from your taxable income for the year. Your property taxes are also deductible. These incentives are provided by the Federal and state governments to encourage more families to buy their home.

There are two additional benefits of having a mortgage and being a responsible borrower. First, your credit score will increase. Making regular payments on your mortgage (or any loan) improves your credit history, increases your FICO score and boosts your creditworthiness. Your ability to take future loans at a lower rate will significantly improve. Second, your personal equity (wealth) will increase as you pay off your mortgage loan. Your personal equity is a measure of assets minus your liabilities.  Higher equity will boost your credit score. It is also a significant factor in your retirement planning.

Buying a home and applying for a mortgage is a long and tedious process. It requires a lot of legwork and documentation. After the financial crisis in 2008 banks became a lot stricter in their requirements for providing mortgage loans to first buyers. Nevertheless, mortgage interest on a primary residence is one of the biggest tax breaks available to taxpayers.

 

2. Home office deductions

Owning a home versus renting is a dilemma for many young professionals. While paying rent offers flexibility and lower monthly cash payments it doesn’t allow you to deduct your rent from your taxes. Rent is usually the highest expense in your monthly budget. It makes up between 25% and 35% of your total income. The only time you can apply your rent as a tax deduction is if you have a home office.

A home office is a dedicated space in your apartment or house to use for the sole purpose of conduction your private business. It’s usually a separate room, basement or attic designated for your business purposes.

The portion of your office to the total size of your home can be deductible for business purposes. If your office takes 20% of your home, you can deduct 20% of the rent and utility bills for business expense purposes.

 

3. Charitable donations

Monetary and non-monetary contributions to religious, educational or charitable organization approved by IRS are tax deductible. The annual limit is 50% of your AGI (aggregate gross income) for most donations and 30% of AGI for appreciated assets.

Most often people choose to give money. However, you can also donate household items, clothes, cars, and airline miles. The fair value of the donated items decreases your taxable income and therefore will reduce the amount of taxes due to IRS.

Another alternative is giving appreciated assets including stocks and real estate. This is one of the best ways to avoid paying significant capital gain tax on low-cost investments. For one, you are supporting a noble cause. Second, you are not paying taxes for the difference between the market value and purchase cost of your stock. Also, the fair market value of the stock at the time of donation will reduce your taxable income, subject to 30% of AGI rule. If you were to sell your appreciated assets and donate the proceeds to your charity of choice, you would have to pay a capital gain tax on the difference between market value and acquisition cost at the time of sale. However, if you donate the investments directly to the charity, you avoid paying the tax and use the market value of the investment to reduce your taxable income.

 

4. Gifts

Making a gift is not a standard tax deduction. However, making gifts can be a way to manage your future tax payments and pass on the tax bill to family members who pay a lower tax rate. You can give up to $14,000 to any number of people every year without any tax implications. Amounts over $14,000 are subject to the combined gift and estate tax exemption of $5.49 million for 2017.  You can give your child or any person within the annual limits without creating create any tax implications.

Another great opportunity is giving appreciated assets as a gift. If you want to give your children or grandchildren a gift, it is always wise to consider between giving them cash or an appreciated asset directly.  Giving appreciated assets to family members who pay a lower tax rate doesn’t create an immediate tax event. It transfers the tax burden from the higher rate tax giver to the lower tax rate receiver.

 

5. 529 Plans

One of the best examples of how gifts can minimize future tax payments is the 529 college tuition plan. Parents and grandparents can contribute up to $14,000 annually per person, $28,000 per married couple into their child college education fund. The plan even allows a one–time lump sum payment of $70,000 (5 years x $14,000).

529 contributions are not tax deductible on a federal level. However, many states like New York, Massachusetts, Illinois, etc. allow for state tax deductions up to a certain amount. The plan allows your contributions (gifts) to grow tax-free. Withdrawals are also tax-free when using the money to pay qualified college expenses.

 

6. Tax-deferred contributions to 401k, 403b, and IRA

One of my favorite tax deductions is the tax-deferred contribution to 401k and 403b plans. In 2017 the allowed maximum contribution per person is $18,000 plus an additional $6,000 catch-up for investors at age 50 and older. In addition to that, your employer can contribute up to $36,000 for a total annual contribution of $54,000 or $60,000 if you are older than 50.

Most companies offer a matching contribution of 5%-6% of your salary and dollar limit of $4,000 – $5,000. At a very minimum, you should contribute enough to take advantage of your company matching plan. However, I strongly recommend you to set aside the entire allowed annual contribution.

The contributions to your retirement plan are tax deductible. They decrease your taxable income if you use itemized deductions on your tax filing form. Not only that, the investments in your 401k portfolio grow tax-free. You will owe taxes upon withdrawal at your current tax rate at that time.

If you invest $18,000 for 30 years, a total of $540,000 contributions, your portfolio can potentially rise to $1.5m in 30 years at 6% growth rate. You will benefit from the accumulative return on your assets year after year.  Your investments will grow depending on your risk tolerance and asset allocation. You will be able to withdraw your money at once or periodically when you retire.

 

7. Commuter benefits

You are allowed to use tax-free dollars to pay for transit commuting and parking costs through your employer-sponsored program.  For 2017, you can save up to $255 per month per person for transit expenses and up to $255 per month for qualified parking. Qualified parking is defined as parking at or near an employer’s worksite, or at a facility from which employee commutes via transit, vanpool or carpool. You can receive both the transit and parking benefits.

If you regularly commute to work by a bike you are eligible for $20 of tax-free reimbursement per month.

By maximizing the monthly limit for both transportation and parking expenses, your annual cost will be $6,120 ($255*2*12). If you are in the 28% tax bracket, by using the commuter benefits program, you will save $1,714 per year. Your total out of pocket expenses will be $ 4,406 annually and $367 per month.

 

8. Employer-sponsored health insurance premiums

The medical insurance plan sponsored by your employer offers discounted premiums for one or several health plans.  If you are self-employed and not eligible for an employer-sponsored health plan through your spouse or domestic partner, you may be able to deduct your health insurance premiums.  With the rising costs of health care having a health insurance is almost mandatory.  Employer-sponsored health insurance premiums can average between $2,000 for a single person and 5,000 for a family per year. At a 28% tax rate, this is equal to savings between $560 and $1,400. Apart from the tax savings, having a health insurance allows you to have medical services at discounted prices, previously negotiated by your health insurance company. In the case of emergency, the benefits can significantly outweigh the cost of your insurance premium.

 

9. Flexible Spending Account

Flexible Spending Account (FSA) is a special tax-advantaged account where you put money aside to pay for certain out-of-pocket health care costs. You don’t pay taxes on these contributions. This means you will save an amount equal to the taxes you would have paid on the money you set aside. The annual limit per person is $2,600. For a married couple, the amount can double to $5,200. The money in this account can be used for copayments, new glasses, prescription medications and other medical and dental expenses not covered by your insurance.  FSA accounts are arranged and managed by your employer and subtracted from your paycheck.

Let’s assume that you are contributing the full amount of $2,600 per year and your tax rate is 28%. You effectively save $728 from taxes, $2,550 * 28%. Your actual out-of-pocket expense is $1,872.

One drawback of the FSA is that you must use the entire amount in the same tax year. Otherwise, you can lose your savings. Some employers may allow up to 2.5 months of grace period or $500 of rollover in the next year. With that in mind, if you plan for significant medical expenses, medication purchases or surgery, the FSA is a great way to make some savings.

 

10. Health Spending Account

A health savings account (HSA) is a tax-exempt medical savings account available to taxpayers who are enrolled in a high-deductible health plan (HDHP) The funds contributed to this account are not subject to federal income tax at the time of deposit. Unlike a flexible spending account (FSA), HSA funds roll over and accumulate year over year if not spent. HSA owners can use the funds to pay for qualified medical expenses at any time without tax liability or penalty. The annual contribution limits are $3,350 per person, $6,750 per family and an additional $1,000 if 55 or older. The owner of HSA can invest the funds similarly to IRA account and withdraw without penalty when used for medical expenses.

 

11. Disability  insurance

Disability premiums are generally not deductible from your tax return. They are paid with after-tax dollars. Therefore, any proceeds received as a result of disability are tax-free. The only time your benefits are taxable is when your employer pays your disability insurance and does not include it in your gross income.


12. Life insurance

Life insurance premiums are typically not deductible from your tax return if you are using after-tax dollars. Therefore, any proceeds received by your beneficiaries are tax-free.

Life insurance benefits can be tax deductible under an employer-provided group term life insurance plan. In that case, the company pays fully or partially life insurance premiums for its employees.  In that scenario, amounts more than $50,000 paid by your employer will trigger a taxable income for the “economic value” of the coverage provided to you.

If you are the owner of your insurance policy, you should make sure your life insurance policy won’t have an impact on your estate’s tax liability. In order to avoid having your life insurance policy affecting your taxes, you can either transfer the policy to someone else or put it into a trust.

13. Student Loan interest

If you have student loans and you can deduct up to $2,500 of loan interest.  To use this deduction, you must earn up to $80,000 for a single person or $165,000 for a couple filing jointly. This rule includes you,  your spouse or a dependent. You must use the loan money for qualified education expenses such as tuition and fees, room and board, books, supplies, and equipment and other necessary expenses (such as transportation)

14. Accounting and Investment advice expenses

You may deduct your investment advisory fees associated with your taxable account on your tax return.  You can list them on Schedule A under the section “Job Expenses and Certain Miscellaneous Deductions.” Other expenditures in this category are unreimbursed employee expenses, tax preparation fees, safe deposit boxes and other qualifying expenses like professional dues, required uniforms, subscriptions to professional journals, safety equipment, tools, and supplies. They may also include the business use of part of your home and certain educational expenses. Investment advisory fees are a part of the miscellaneous deduction.  The entire category is tax deductible if they exceed 2% of your adjusted gross income for the amount in excess.

 

About the Author: Stoyan Panayotov, CFA is a fee-only financial advisor based in Walnut Creek, CA. His firm Babylon Wealth Management offers fiduciary investment management and financial planning services to individuals and families.

Disclaimer: Past performance does not guarantee future performance. Nothing in this article should be construed as a solicitation or offer, or recommendation, to buy or sell any security. The content of this article is a sole opinion of the author and Babylon Wealth Management. The opinion and information provided are only valid at the time of publishing this article. Investing in these asset classes may not be appropriate for your investment portfolio. If you decide to invest in any of the instruments discussed in the posting, you have to consider your risk tolerance, investment objectives, asset allocation and overall financial situation. Different investors have different financial circumstances, and not all recommendations apply to everybody. Seek advice from your investment advisor before proceeding with any investment decisions. Various sources may provide different figures due to variations in methodology and timing,  Image Copyright: www.123rf.com

10 Ways to reduce taxes in your investment portfolio

10 Ways to reduce taxes in your investment portfolio

Successful practices to help you lower taxes in your investment portfolio

A taxable investment account is any brokerage or trust account that does not come with tax benefits. Unlike Roth IRA and Tax-Deferred 401k plans, these accounts do not have many tax advantages. Your contributions to the account are with after-tax dollars. This is money you earned from salary, royalties, the sale of a property, and so on. All gains, losses, dividends, interest, and other income from any investments are subject to taxes at the current tax rates.  In this post, we will discuss several successful practices that can help you lower taxes in your investment portfolio

Why investors put money into taxable accounts? They provide flexibility and liquidity, which are not available by other retirement accounts. Money is readily accessible for emergencies and unforeseen expenses. Many credit institutions take these accounts as a liquid asset for loan applications.

Since investment accounts are taxable, their owners often look for ways to minimize the tax impact at the end of the year. Several practices can help you reduce your overall tax burden.

1. Buy and Hold

Taxable investment accounts are ideal for buy and hold investors who don’t plan to trade frequently. By doing that investors will minimize trading costs and harvest long-term capital gains when they decide to sell their investments. Long-term capital gains are taxable at a favorable rate of 0%, 15% or 20% plus 3.8% Medicare surcharge. In contrast, short-term gains for securities held less than a year are taxed at the higher ordinary income level.

Individuals and families often use investments accounts for supplemental income and source of liquidity. Those investors are usually susceptible to market volatility. Diversification is the best way to lower market risk. I strongly encourage investors to diversify their portfolios by investing in uncorrelated assets including mid-cap, small-cap, international stocks, bonds, and real assets.

2. Invest in Municipal Bonds

Most municipal bonds are exempt from taxes on their coupon payments. They are considered a safer investment with a slightly higher risk than Treasury bonds but lower than comparable corporate bonds.

This tax exemption makes the municipal bond suitable investment for taxable accounts, especially for individuals in the high brackets category.

3. Invest in growth non-dividend paying stocks

Growth stocks that pay little or no dividends are also a great alternative for long-term buy and hold investors. Since the majority of the return from stocks will come from price appreciation, investors don’t need to worry about paying taxes on dividends. They will only have to pay taxes when selling the investments. 

4. Invest in MLPs

Managed Limited Partnerships have a complex legal and tax structure, which requires them to distribute 90% of their income to their partners. The majority of the distributions come in the form return on capital which is tax-deferred and deducted from the cost basis of the investments. Investors don’t owe taxes on the return on capital distributions until their cost basis becomes zero or decide to sell the MLP investment.

One caveat, MLPs require K-1 filing in each state where the company operates, which increases the tax filing cost for their owners.

 5. Invest in Index Funds and ETFs

Index funds and ETFs are passive investment vehicles. Typically they track a particular index or a benchmark. ETFs and index funds have a more tax-efficient structure that makes them suitable for taxable accounts. Unlike them, most actively managed mutual funds frequently trade in and out of individual holdings causing them to release long-term and short-term capital gains to shareholders.

6. Avoid investments with a higher tax burden

While REITs, taxable bonds, commodities, and actively managed mutual funds have their spot in the investment portfolio, they come with a higher tax burden.

The income from REITs, treasuries, corporate and international bonds is subject to the higher ordinary income tax, which can be up to 39.6% plus 3.8% Medicare surcharge

Commodities, particularly Gold are considered collectibles and taxed at a minimum of 28% for long-term gains.

Actively managed funds, as mentioned earlier, periodically release long-term and short-term capital gains to their shareholders, which automatically triggers additional taxes.

7. Make gifts

You can use up to $14,000 a year or $28,000 for a couple to give to any number of people you wish without tax consequences. You can make gifts of cash or appreciated investments from your investment account to family members at a lower tax bracket than yours.

8. Donate 

You can make contributions in cash for up to 50% of your taxable income to your favorite charity. You can also donate appreciated stocks for up to 30% of AGI. Consequently, the value of your donation will reduce your income for the year. If you had a good year when you received a big bonus, sold a property or made substantial gains in the market, making donations will help you reduce your overall tax bill for the year.

9. Stepped up cost basis

At the current law, the assets in your investment account will be received by your heirs at the higher stepped-up basis, not at the original purchase price. If stocks are transferred as an inheritance directly (versus being sold and proceeds received in cash), they are not subject to taxes on any long-term or short-term capital gains. Your heirs will inherit the stocks at the new higher cost basis.  However, if your investments had lost value over time, you may wish to consider other ways to transfer your wealth. In this case, the stepped-up basis will be lower than you originally paid for and may trigger higher taxes in the future for your heirs.

10. Tax-loss harvesting

Tax-loss harvesting is selling investments at a loss. The loss will offset gains from other the sale of other securities. Additionally, investors can use $3,000 of investment losses a year to offset ordinary income. They can also carry over any remaining amounts for future tax filings.